Sale of goods to consumers in the EU – changes to come?
- What is Distance Selling?
- The Future of Distance Selling Rules
- How will Brexit affect Distance Selling?
What is Distance Selling?
Distance selling refers to the sale of goods which are dispatched or transported from a business in one EU Member State to a private customer (not VAT registered) in another Member State. This is commonly referred to as B2C sales (Business to Consumer). Examples of distance selling would include selling goods over the internet, mail order, tele-sales or phone selling to private customers in other EU Member States with the goods being shipped from Ireland to another EU Member State.
Distance sellers selling into other EU Member States are not required to register for VAT in the other jurisdiction unless they breach a distance selling threshold. These thresholds vary across the EU from euro equivalent lows of €26,135 per annum in Romania to highs of €100,000 in Germany, Luxembourg and Netherlands. In Ireland the distance selling threshold is €35,000 for a calendar year and if, for example, an online UK retailer sold goods worth more than €35,000 to consumers in Ireland they must register for Irish VAT at the point the threshold is breached and then charge Irish VAT on future sales going forward. Before breaching the threshold the UK supplier can charge UK VAT.
The variance in distance selling threshold across the EU Members States creates a potential trap whereby distance sellers may not realise they have breached a threshold and have a VAT obligation in that Member State. Many businesses across the EU are either unaware of their obligation to register for VAT in another jurisdiction or blatantly ignore it. Correcting these failures when detected can prove to be quite costly for distance sellers with VAT owed in other Member States, with interest and penalties levied and also the risk of publication for non-compliance with tax rules in the Member States affected. Distance sellers can avoid such issues by closely monitoring sales and thresholds or by electing to register for VAT in each Member State regardless of the level of sales made into which they sell goods but this will, of course, increase a distance sellers VAT compliance costs and obligations.
The Future of Distance Selling Rules
Distance selling rules potentially have a brief life remaining following the European Commission’s announcement on the 4th of October 2017 that they plan to simplify cross-border trade to individuals by extending the “Mini One Stop Shop” (MOSS) which currently applies to electronically supplied services.
What this means is that Irish businesses engaged in cross-border B2C trade will be able to manage their EU VAT obligations using a single online portal with Irish Revenue which would then remove the requirement of having multiple VAT registrations across the EU where distance sales thresholds are breached. A similar facility will be available in each jurisdiction.
The European Commission expects that the administrative burden and associated compliance costs should be reduced by up to 18% per year for such businesses. However, any major change, such as this, brings additional costs and time inputs to adapt ERP systems, update tax codes, train staff and update internal processes and controls. Such costs should not be underestimated and businesses should take early action to ensure they are ready for the changes to come.
How will Brexit affect Distance Selling?
The concept of distance selling only applies in an EU context. According to the CSO, in 2015 Ireland sold €15.6 billion worth of goods to the UK while the UK sold €18 billion worth of goods to Ireland. Although this statistic includes goods sold to business and private consumers it is clear that the distance selling rules play an important role in the Irish and UK trade relationship. Having a market of 65 million people on your doorstop provides Irish businesses with the opportunity to sell their goods to private customers.
Based on current rules Irish businesses that do not breach the UK distance selling threshold of £70,000 are not required to register for VAT in the UK instead they can sell their goods using the applicable Irish VAT rate thereby reducing their VAT compliance costs. It is worth noting that the disparity in the VAT rates between Ireland (23%, 13.5%, 9%, 4.8% and 0%) and the UK (20%, 5% and 0%) means that some businesses may elect to register in the UK to avail of a lower VAT rate for their products and compete on an even footing with local UK businesses.
While the fallout from Brexit is still uncertain it is likely that distance selling rules in their current form will no longer apply post Brexit. Individuals in the UK purchasing goods from Irish businesses will likely incur an import VAT charge and quite possibly custom duties, while the same position will apply to Irish customers purchasing from UK businesses. In order to protect their competiveness in the UK market Irish retailers should immediately put a Brexit plan in place which may include a change to their supply chain and UK VAT registration status.
Should you have any queries on this article’s contents or would like our assistance with dealing with any of the issues discussed, please contact Christopher Connolly.